Question

Morrisey & Brown, Ltd., of Sydney, Australia, is a merchandising firm that is the sole distributor of a product that is increasing in popularity among Australian consumers. The company’s income statements for the three most recent months follow:

MORRISEY & BROWN, LTD. Income Statements
For the Four Quarters Ending December 31
	Quarter 1			Quarter 2			Quarter 3			Quarter 4
Sales in units		4,800			4,300			5,360			4,900
Sales revenue	A$	480,000		A$	430,000		A$	536,000		A$	490,000
Less: Cost of goods sold		288,000			258,000			321,600			294,000
Gross margin		192,000			172,000			214,400			196,000
Less: Operating expenses:
Advertising expense		21,300			21,300			21,300			21,300
Shipping expense		35,200			37,200			41,440			37,140
Salaries and commissions		79,800			78,600			91,320			86,740
Insurance expense		6,300			6,300			6,300			6,300
Depreciation expense		15,300			15,300			15,300			15,300
Total operating expenses		157,900			158,700			175,660			166,780
Net income	A$	34,100		A$	13,300		A$	38,740		A$	29,220

(Note: Morrisey & Brown, Ltd.’s Australian-formatted income statement has been recast into the format common in Canada. The Australian dollar is denoted by A$.)

Required:

1. Identify each of the company’s expenses (including cost of goods sold) as being variable, fixed, or mixed.

2-a. Using the high-low method, separate each mixed expense into variable and fixed elements.

2-b. Using the high-low method, state the cost formula for each mixed expense.

3. Redo the company's income statement at the 5,360-unit level of activity using the contribution format.

4. Assume that the company’s sales are projected to be 4,650 units in the next quarter. Prepare a contribution margin income statement.

Answer 1

Expenses	Classification
Cost of goods sold	Variable Costs
Advertising expenses	Fixed Costs
Shipping expenses	Mixed Costs
Salaries and commissions	Mixed Costs
Insurance expense	Fixed Costs
Depreciation expense	Fixed Costs
Shipping expenses
	Units Produced	Shipping expenses
High level of activity	5,360	$41,440
Low level of activity	4,300	$37,200
Change	1,060	$4,240
Variable Cost per unit =$4,240 / 1,060 units =$4 per unit
Fixed cost element =$37,200 - (4,300*$4.00) =$20,000
Fixed cost element =$20,000
Cost equation is:Y =$20,000 + ($4.00*units produced)
Salaries and commissions
	Units Produced	Salaries and commissions
High level of activity	5,360	$91,320
Low level of activity	4,300	$78,600
Change	1,060	$12,720
Variable Cost per unit =$12,720 / 1,060 units =$12 per unit
Fixed cost element =$78,600 - (4,300*$12.00) =$28,000
Fixed cost element =$27,000
Cost equation is:Y =$27,000 + ($12.00*units produced)
MORRISEY & BROWN LTD.
Contribution Margin Projected Income Statement
For the Quarter Ended March 31
Sales in Units		5360
Sales Revenues		$                           536,000
Less:Variable expenses
Cost of goods sold	$                     321,600
Shipping expenses	$                       21,440
Sales and Commissions	$                       64,320
Total Variable expenses		$                           407,360
Contribution Margin		$                           128,640
Less:Fixed expenses
Advertising expenses	$                       21,300
Shipping expenses	$                       20,000
Sales and Commissions	$                       27,000
Insurance expenses	$                         6,300
Depreciation expenses	$                       15,300
Total Fixed expenses		$                             89,900
Net Income		$                             38,740
MORRISEY & BROWN LTD.
Contribution Margin Projected Income Statement
For the Quarter Ended March 31
Sales in Units		4650
Sales Revenues		$                           465,000
Less:Variable expenses
Cost of goods sold	$                     279,000
Shipping expenses	$                       18,600
Sales and Commissions	$                       55,800
Total Variable expenses		$                           353,400
Contribution Margin		$                           111,600
Less:Fixed expenses
Advertising expenses	$                       21,300
Shipping expenses	$                       20,000
Sales and Commissions	$                       27,000
Insurance expenses	$                         6,300
Depreciation expenses	$                       15,300
Total Fixed expenses		$                             89,900
Net Income		$                             21,700